The Corean Chronicles
Why the Bailout Failed and What to Do About It
Long years ago, when I was first involved in politics, my mentor was a courtly political operative named, believe it or not, Robert Lee. Bob Lee had an impressive record of masterminding unlikely political success stories, but he understood the basics of practical politics better than anyone I ever knew. He provided two basic insights about politics, among others, that have stuck with me and seem particularly apropos to the current situation. The first was, "Don't mistake money for results." By that he meant that too many politicians and political operatives concentrated on fund-raising when the goal wasn't to raise money, but to get more people to vote for your candidate. In the end, what counted was not how much money you raised, but how many votes you got. The second point was that to win any political race, "you have to give people something to vote for."
The current bailout effort in
If the current Congress and Administration really want to stop the crisis, they need to give people something to vote for, and a reason to support their "reform package."
Here are a few suggestions. First, cap total executive compensation for any company being bailed out at a mere 100 times the pay of an average worker in the company[as opposed to the thousand plus multiple in some cases], and also make any compensation paid above that amount in any other company in the USA non-deductible for tax purposes. Second, not only continue the existing prohibition on naked short-selling [the principal contributing factor to a number of corporate failures], but require any brokerage firm which does so to be closed for violating the law and [in case future administrations decide to turn a blind eye, as has the present administration] make any violation a cause for civil recompense and quintuple damages. This will get the attorneys working for the public good instead of against it. Third, limit the amount of mortgage payment escalations in adjustable rate mortgages to something approximately realistic [perhaps no more than a 10% increase in payments annually] and eliminate excessive prepayment penalties. Fourth, eliminate the securitization/bundling of sub-prime mortgages with other classes of mortgages. If the bankers and lenders want to bundle mortgages, let them do so, but make them bundle like with like. That way the risks are out in the open. Fifth, enact specific reserve requirements for all classes of debt, including CDOs and other collateralized obligations. Sixth, make violations of these provisions criminal offenses.
I'm sure other thinking individuals could come up with proposals that both make sense and which would garner public support, but these are a few that should be considered. There are other approaches, including a government-backed restructuring of debt markets with more private investment that might work as well... but whatever solution is next proposed must explain the positive benefits.
As for the argument that the financial community won't like these... well, aren't you the ones asking for rescue? Shouldn't the taxpayers who are underwriting the rescue be the ones setting a few terms, particularly since the financial community hasn't shown much fiscal or moral responsibility lately?
"cap total executive compensation"
This alone will make the bailout fail to do any good whatsoever. The number of companies that would agree to this at any time prior to their actual failure is zero.
"continue the prohibition on naked shorts"
Also foolhardy and, ahem, short-sighted. By eliminating short sales you're making the market less efficient, and making executives much less accountable for their decisions. Remember, it was short sellers who basically exposed the problems at Enron and other recent similar cases.
"Third, limit the amount of mortgage payment escalations in adjustable rate mortgages to something approximately realistic...eliminate excessive prepayment penalties."
We'd be better served by getting those people who are in a mortgage they truly can't afford out entirely, and back into rentals where they should have been in the first place. So if I'm going to offer a handout to people who chose poorly, I'd rather it be one that provided, say, sales assistance, allowing some of those folks to actually cash out any minimal equity they have.
"Fourth, eliminate the securitization/bundling of sub-prime mortgages with other classes of mortgages."
No real problems here, except it won't actually help the current situation. A time machine and this rule 10 years ago might have helped prevent it.
"Fifth, enact specific reserve requirements for all classes of debt, including CDOs and other collateralized obligations."
In general, the market is taking care of this now. The over-leveraged firms are failing (as they should), assets are being bought up cheaply, and companies ajust their behavior appropriately. But let's say that all these firms had used a 10-1 leverage like a more traditional bank would have, than the 30-1 that they were using. The firms would still be failing, because the market value on these securities is most likely somewhere around 30 cents on the dollar that they paid. So they'd still be dumping them in a fire sale to meet reserve requirements, they'd still be getting margin calls, and they'd still be failing.
I didn't say to eliminate short-selling. I agree. The market needs it. What I said was to eliminate NAKED short-selling, which has always been illegal, but which prohibition has never been enforced by the SEC.
If what you're saying about executive compensation is true, then it just may be time for a Wall Street melt-down, because you're suggesting no limits on the CEOs who have already lost $300 billion for their companies and who will probably lose another $600 billion before it's all over. When people get paid $60 million for presiding over such a mess, and you suggest that they won't see their pay limited, I suggest that there are more than a few very competent executives who could do just as well, if not better, with far less compensation. Besides, if they want more money, all they have to do is pay their people more.
As for the other problems, the difficulty isn't now; it's what happens in another decade when everyone -- AGAIN -- forgets the lessons of market history.
Rentals cost more than mortgages, because the property owner has to get his mortgage payment and a profit out of the rental.When the loans were made to these people, they could afford the payments. Their credit was not-so-hot, so the lenders played games to get them approved. Then the interest payments ballooned to an extortional level that most people couldn't afford no matter what their credit looked like.
Skip said: "We'd be better served by getting those people who are in a mortgage they truly can't afford out entirely, and back into rentals where they should have been in the first place."
Why would you assume ANYONE belongs in a rental? There is no true benefit to a rental in long term thinking. For short term, it might keep the rain off their heads, but at the end of the day they end up with nothing. Rentals are short term solutions.
Property ownership benefits society in the same ways a rental degrades society.
As acpaul said, those people *could* afford their mortgage payments when they bought their houses.
I build homes for a living and have been riding the boom and bust cycle for almost thirty years. I rented for a lot of those years because I misread the signs. What we are going through has been around for generations. We want huge growth now instead of a slow steady growth over the long haul. Prices get inflated and out of reach and the bubble has to burst to reflect the real world. The problem is not the housing industry, or the stock market, the problem is greed and shortsightedness. How do we fix that?
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